Legislative Audit Division State of Montana

Transcription

1 Legislative Audit Division State of Montana January 2006 Report to the Legislature Performance Audit Small Business Development Centers Business Resources Division Department of Commerce This report provides findings and recommendations developed as a result of a performance audit of the Small Business Development Centers program. Findings and recommendations address: Provision of SBDC services and alternative service providers. Compliance with federal regulations. Trends in program counseling and training activities. Program services for veterans and American Indians. Economic trends and program service areas. Program outputs and outcomes reporting. Direct comments/inquiries to: Legislative Audit Division Room 160, State Capitol PO Box P-04 Helena MT Help eliminate fraud, waste, and abuse in state government. Call the Fraud Hotline at statewide or in Helena.

2 PERFORMANCE AUDITS Performance audits conducted by the Legislative Audit Division are designed to assess state government operations. From the audit work, a determination is made as to whether agencies and programs are accomplishing their purposes, and whether they can do so with greater efficiency and economy. The audit work is conducted in accordance with audit standards set forth by the United States Government Accountability Office. Members of the performance audit staff hold degrees in disciplines appropriate to the audit process. Areas of expertise include business and public administration, mathematics, statistics, economics, political science, criminal justice, computer science, education, and biology. Performance audits are performed at the request of the Legislative Audit Committee, which is a bicameral and bipartisan standing committee of the Montana Legislature. The committee consists of six members of the Senate and six members of the House of Representatives. MEMBERS OF THE LEGISLATIVE AUDIT COMMITTEE Senator Joe Balyeat, Vice Chair Senator John Brueggeman Senator Jim Elliott Senator Dan Harrington Senator Lynda Moss Senator Corey Stapleton Representative Dee Brown Representative Hal Jacobson Representative Christine Kaufmann Representative Scott Mendenhall Representative John Musgrove, Chair Representative Janna Taylor

3 LEGISLATIVE AUDIT DIVISION Scott A. Seacat, Legislative Auditor John W. Northey, Legal Counsel Deputy Legislative Auditors: Jim Pellegrini, Performance Audit Tori Hunthausen, IS Audit & Operations James Gillett, Financial-Compliance Audit January 2006 The Legislative Audit Committee of the Montana State Legislature: This is our performance audit of Small Business Development Centers (SBDC), a program administered by the Department of Commerce. This report includes information on continuing public provision of SBDC services, availability of alternative service providers, program administration and compliance with federal regulations, program activity and service provision trends, analysis of economic trends in program service areas, and program outcomes reporting. A written response from the Department of Commerce is included at the end of the report. We wish to express our appreciation to SBDC counselors and Department of Commerce staff for their cooperation and assistance during the audit. Respectfully submitted, /s/ Scott A. Seacat Scott A. Seacat Legislative Auditor Room 160, State Capitol Building PO Box Helena, MT Phone (406) FAX (406) lad@mt.gov

4 Legislative Audit Division Performance Audit Small Business Development Centers Business Resources Division Department of Commerce Members of the audit staff involved in this audit were Lisa Blanford and Angus K. Maciver.

5 Table of Contents List of Figures and Tables... iv Appointed and Administrative Officials... v Glossary of Summary... vi Report Summary...S-1 Chapter I - Introduction & Background... 1 Introduction... 1 Audit Objectives... 1 Audit Approach... 2 Background Information... 2 Statutory References... 3 SBDC Network Structure... 4 SBDC Advisory Board... 5 SBDC Counseling and Training Activities... 6 Federal SBDC Administration... 6 Program Funding... 7 Report Organization... 9 Chapter II - Evaluation of SBDC Service Provision Introduction Comparison Group Study of SBDC Economic Impact Comparison Group Design Trends in Reported Taxable Income Trends in Reported Employment Data Trends for Population Sub-Sectors SBDC Business Benefit from Enhanced Productivity SBDC Program Meets Its Primary Objective SBDC Service Provision Program Provides Basic Business Planning Assistance Private Sector Service Providers Calculating the Cost of Private Services Private Sector Services Are Available, But Costly Other Service Providers Locations of Public Sector Providers Overlap Exists Among Service Providers Overall Conclusion SBDC Program Could Improve Operational Efficiency and Effectiveness Chapter III - Program Compliance & Administration Introduction Federal Administrative & Compliance Standards Program Meets Federal Compliance Standards Program Oversight Procedures Contractual Relationship Between Lead and Sub-Centers Lead Center Meets Federal Compliance and Oversight Standards Page i

6 Table of Contents SBA Business Size Regulations Trends in Client Business Types Some Businesses Exceed Size Regulations SBDC Over-Reported Some Client Data Program Managers Need to Improve Oversight of Client Records Comparison with Other States University System Administration of SBDC Programs Network Structures in Western States Federal and State Funding of SBDC Overall Conclusion Chapter IV Counseling & Training Activities Introduction Data Analysis Definitions and Parameters Sub-Center Documentation Procedures Counseling & Training Activities are Documented Correctly Counseling and Training Activity Trends Number of Clients Counseled is Decreasing Training Events and Attendance are Increasing Program Uses Training to Screen Participants Analysis of Training Event Locations Program Should Address Availability of Training in Some Locations Client Demographic Trends Special Emphasis Groups Trends in Veteran Participation Program Should Conduct Further Analysis of Veteran Participation American Indian Participation Reservation Training Activities Indian Economic Development Initiatives SBDC Program Should Address Reservation Activities Overall Conclusion Chapter V - Economic Trends & SBDC Service Areas Introduction SBDC Client Locations SBDC Serves a Predominately Urban Clientele Small Business Activity in SBDC Service Areas Analysis of County Economic Growth Trends Trends in SBDC Client Activities Observed Trends in Sub-Center Performance Several Factors Could Affect Sub-Center Workload Program Should Address Resource Allocation Effects of Some Programmatic Trends are Uncertain Further Monitoring and Resource Allocation Changes are Necessary Page ii

7 Table of Contents Client Activity Trends Not Commensurate With Prevailing Economic Conditions Intervention Required to Correct Resource Allocation Overall Conclusion Chapter VI - Program Outcomes Reporting Introduction Program Outputs and Performance Goals Analysis of SBDC Outputs Performance Targets Adjustments in Performance Targets are Necessary Verifying SBDC Outcomes and Economic Impact Program Approach to Outcomes Reporting is Conservative Outcomes Data Cannot be Independently Verified Existing Economic Impact Studies Rely on Self-Reported Data SBDC Program Outcomes Reporting Reported Outcomes Data and Trends Reported Outcomes in Other States Improvements in Performance Measurement System Needed Overall Conclusion Appendix A - Audit Approach...A-1 Audit Scope...A-1 Audit Methodologies...A-1 Audit Planning...A-1 SBDC Service Provision...A-2 Alternative Service Providers...A-2 Administrative Compliance and Oversight...A-3 SBDC Counseling and Training Activities...A-4 Economic Trends in Program Serviec Areas...A-4 Program Outputs and Outcomes Reporting...A-5 Department Response...B-1 Department of Commerce...B-3 Page iii

8 List of Figures and Tables FIGURES Figure 1 Montana SBDC Regional Network... 4 Figure 2 Report Organization Figure 3 Median Taxable Business Income for Comparison Groups Figure 4 Median Annual Payroll per Employee for Comparison Groups Figure 5 46 Montana Communities With Business Technical Assistance Resources Figure 6 SBDC Clients Counseled and Average Hours per Client Figure 7 Density Distribution of SBDC Clients Figure 8 Growth in Business Establishments by SBDC Service Area Figure 9 Median Annual Variance in Sub-Center Client Activity Performance Level Figure 10 Trends for Selected Output Performance Measures Figure 11 Trends in Reported Outcomes Data Figure 12 Selected Outcomes Data for Other Sources TABLES Table 1 Basic Management Information for SBDC... 3 Table 2 SBDC Funding Sources and Amounts... 8 Table 3 Lead Center and Sub-Center Budgets... 9 Table 4 Type of Counseling Services Provided Table 5 SBDC Network Structures in Montana and Other Western States Table 6 State and Non-Governmental Funding of SBDC Programs Table 7 Veteran Participation By SBDC Sub-Center Table 8 SBDC Training Events on Indian Reservations Page iv

9 Appointed and Administrative Officials Department of Commerce Anthony J. Priete, Director Andy Poole, Administrator, Business Resources Division Ann Desch, State Director, Small Business Development Centers Page v

10 Glossary of Terms Montana Department of Commerce Business Resources Division SBDC...Small Business Development Centers CRDC...Certified Regional Development Corporations RDO...Regional Development Officers Federal Government SBA...Small Business Administration USDA...United States Department of Agriculture RC&D...Resource Conservation and Development Districts PTAC...Procurement Technical Assistance Centers TBIC...Tribal Business Information Centers Other MMEC...Montana Manufacturing Extension Center SCORE...Service Corps of Retired Executives ASBDC...Association of Small Business Development Centers Page vi

11 Report Summary Introduction The Small Business Development Center (SBDC) program provides business technical assistance through individual counseling and group training. Services are provided through a network of 10 regional sub-centers and the program is administered through a lead center based in the Montana Department of Commerce (the department). SBDC is a nationwide program and the Small Business Administration (SBA) is responsible for program administration at the federal level. SBDC Program Meets Overall Objectives Audit findings and conclusions show the SBDC program is meeting its overall goals and provides benefits to businesses. The program is providing benefits to businesses receiving counseling services. We also conclude that private sector alternatives to program services are either unavailable or unaffordable. We did identify areas where the efficiency or effectiveness of program operations could be improved. Specifically, we address improvements in compliance with federal regulations, delivery of services to special emphasis groups, network resource allocation, and performance measurement procedures. Background Information Montana SBDC Network State and Federal SBDC Administration SBDC was developed to provide small businesses professional counseling and training services they could not otherwise access or afford. Services are delivered through individual sessions with a SBDC counselor, or through group training workshops organized by the regional sub-centers. SBDC sub-centers are located in Kalispell, Missoula, Butte, Helena, Bozeman, Great Falls, Havre, Billings, Colstrip and Wolf Point. Sub-centers are located in host agencies contracting with the department to deliver SBDC services within the region. Nine of the host agencies are local economic development corporations and one (Kalispell) is a chamber of commerce organization. The SBDC lead center is located in the department s Business Resources Division. The lead center employs 2.5 FTE to administer the program, including the State Director responsible for general management and oversight of the whole network. Federal oversight is exercised through SBA state and regional offices. The Association of Small Business Development Page S-1

12 Report Summary Centers (ASBDC) represents local lead centers and networks in negotiations with the SBA and provides members with information, advice and other services. Program Funding SBDC is funded through federal, state and local (host agency) contributions. SBA makes an annual grant to the lead center. The annual grant amount is currently $500,000. The total SBDC budget for 2005 was approximately $1.4 million. The majority of the budgeted funds for the SBDC program in Montana are contributed by host agencies (47 percent), followed by the federal and state government contributions (35 and 18 percent respectively.) SBDC Service Provision Our first audit objective was to determine if the SBDC program provides services that are beneficial to participating businesses and do not duplicate services that are already available. Comparison Group Study of SBDC Economic Impact We conducted a comparison group study to estimate what effects participating in the SBDC program has on client businesses. The comparison group study looked at changes in income and employment for two groups. The first group received SBDC counseling services and the second group received no assistance from the program. Using data from the Department of Revenue and the Department of Labor and Industry, we tracked and compared growth in taxable business income and employment data for both groups. Overall, the comparison group study shows the program is delivering benefits to participants. In terms of growth in annual taxable income and annual payroll per employee, participation in the SBDC program appears to provide small businesses in Montana with significant benefits. Alternative Service Providers Small businesses seeking technical assistance have access to other service providers in both the public and private sectors. The benefits provided by SBDC services are important, but the program must also be able to demonstrate that alternative programs or organizations Page S-2

13 Report Summary cannot provide similar services and benefits or can do so at reduced cost. Private Sector Service Providers Based on reported hourly billable rate of $150, private sector management consultant services would cost $672 for the average SBDC client. In addition, the services typically being sought by SBDC businesses are related to basic business planning functions. Private sector management consultants typically concentrate on more specialized services. Given the types of services generally offered by management consultants and the costs involved in retaining the services of specialized firms, it is unlikely SBDC functions would be provided solely through the private sector. Other Service Providers Business technical assistance is also provided by public sector organizations, public-private partnerships, and non-profit groups. Review of information from other providers showed each program or service has a specific mission, but in some cases there is not always a clear boundary established between SBDC resources and services and those of other providers. However, despite overlaps in service provision, the SBDC program occupies a niche position and its services are not entirely replicated by any other provider. Program Compliance and Administration Audit objectives addressed the extent to which the SBDC program meets federal compliance standards and the degree of consistency between Montana s administrative structure and programs in other states. Some Businesses Exceed Size Regulations As with all SBA-administered programs, SBDC operations are governed by federal regulations relating to the size of the businesses receiving assistance. To determine whether businesses participating in the Montana SBDC program meet size regulations, we reviewed program records. Eight of the fifteen businesses included in our review did not meet SBA business size regulations. Improving awareness of the SBA business size regulations among sub-center directors and lead center oversight of sub-center data reporting could prevent future occurrences of non-complying businesses accessing SBDC services. Page S-3

14 Report Summary Comparison With Other States All 50 states currently participate in the SBDC program and there are over 1,100 sub-centers in locations around the country. Montana s SBDC network structure is consistent with the state s low population density and high land area as compared with other western states. Federal law establishes the distribution of funding to state SBDC programs and also sets minimum matching requirements for recipient organizations. When compared with other states, Montana has been effective in using host agency contributions to leverage state funding and increase resources available for SBDC program operations Counseling and Training Activities SBDC counselors provide two primary services to clients; individual counseling sessions and group training events. Audit objectives addressed how well the program serves the state s small business community. Trends in Counseling and Training Activities Analysis of trend data for clients counseled between 1998 and 2004 showed that there has been a gradual decline in the number of clients counseled by the program. As the number of clients counseled has decreased, the average number of counseling hours per client has increased. We also analyzed training data for 1998 through 2004 to identify how many events were held by each sub-center in each year. There are clear trends indicating the number of events is increasing across the network. Discussions with SBDC counselors and lead center staff indicate the program is using training events to screen for participants with more advanced business plans. As client workloads decline, counselors can spend more time counseling individual clients. The Montana SBDC program is pursuing a strategy of reducing client workloads through time-intensive counseling and expanded training opportunities. Training Event Locations Additional analysis of training addressed locations of events in cities and towns around the state. In general, sub-centers ensured training events were held in different communities around the service area. The exception to this trend was the Billings sub-center. The department should ensure cooperative agreements and host agency Page S-4

15 Report Summary contracts address provision of training opportunities in outlying communities within SBDC service areas. Program Should Conduct Further Analysis of Veteran Participation Outreach to veterans has been identified by SBA and the Montana SBDC program as a special emphasis initiative. Veterans make-up around 11 percent of the state s working-age population and around percent of program participants. However, some disparities were observed at the sub-center level through analysis of data for veteran populations in specific counties. Program managers should continue to monitor the effectiveness of out-reach efforts targeting the state s military veterans. In particular, the effectiveness of outreach efforts in larger cities should be the subject of more detailed analysis to determine if the veteran population in these areas is being effectively served by the program. SBDC Program Should Address Reservation Activities The other special emphasis initiative group targeted by Montana s SBDC program is the American Indian population. Between 1998 and 2004, SBDC participation has declined by around 3 percent annually, but for residents of the state s Indian reservations, the decline is closer to 6 percent. Review of training records for 1998 to 2004 showed that efforts on some of the state s reservations have been inconsistent. By ensuring an enhanced training schedule is properly implemented for Indian reservations, the SBDC sub-centers may be able to raise awareness of the services and resources available through the program. SBDC program services could, potentially, provide a valuable resource for tribal governments addressing the provision of business technical assistance services. Addressing how SBDC resources can help ongoing efforts to promote Indian economic development could clarify the program s role on reservations and relations with tribal and other technical assistance providers. Economic Trends and SBDC Service Areas The SBDC network is configured to deliver services to a specific population; the state s small business community. Our audit objectives included assessment of how closely the structure and organization of the SBDC network corresponds with the dynamics of the private sector economy. Page S-5

16 Report Summary Analysis of County Economic Growth Trends Economic growth in the state has not been even in recent years and counties experiencing significant growth rates are concentrated in the south and west of Montana. SBDC service areas have experienced varying growth rates in the number of business establishments. Three sub-centers (Missoula, Kalispell and Billings) have performed below the ideal level of client activity based on economic trends within their service areas. These sub-centers have served fewer clients than would otherwise be expected based on the projected levels of activity resulting from economic trends in their service areas. Program Should Address Resource Allocation As change in the wider economy accelerates, resource allocation within the SBDC network will become increasingly difficult to manage. As measured against a projected client base, SBDC subcenters in fast-growth urban areas are failing to maintain levels of activity sufficient to meet demand for services. To avoid difficulties in serving clients in the state s urban areas, the department needs to adjust funding distribution and allocate resources to SBDC subcenters based on prevailing economic trends within service areas. The delivering of program services can be improved by allocating funding and other resources based on demand. Program Outcomes Reporting The program uses a performance measurement system to track both outputs and outcomes. Audit objectives included assessment of output targets in the program s performance measurement system and the accuracy and reliability of program outcomes data. Program Outputs and Performance Goals As part of annual cooperative agreements with the SBA, targets are established for activity levels within each sub-center. The program s use of performance targets has been improving, but some disparities still exist between growth trends for target and actual performance data. Performance targets should be monitored to ensure they continue to reflect changes in program conditions. Adjustments should be made in performance targets to ensure they are both realistically achievable and sufficiently challenging. Page S-6

17 Report Summary Verifying SBDC Outcomes and Economic Impact We reviewed program procedures for verifying reported client outcomes and estimating economic impacts through surveys and other studies. Although the program takes a conservative approach to reporting outcomes, significant improvements are needed in verifying the validity of this data. Essentially, the program relies on good faith estimates provided by clients to determine the outcomes attributable to SBDC services. Improvements in Performance Measurement System are needed Program managers should track and report client outcomes, but the success of these efforts relies on consistency in the methodologies used to define and report outcomes. Improvements in data definition and reporting parameters have already been started through the SBA and the ASBDC. Continuing implementation of standardized outcomes data definitions and reporting parameters should improve the quality and reliability of reported outcomes data. Page S-7

18 Chapter I - Introduction & Background Introduction The Small Business Development Center (SBDC) program provides business technical assistance through individual counseling and group training for existing business owners or people interested in starting a business. Services are provided through a network of 10 regional sub-centers around the state and the program is administered through a lead center based in the Montana Department of Commerce (the department). SBDC is a nationwide program and is jointly funded by the federal government, and state and local partners. The Small Business Administration (SBA) is responsible for program administration at the federal level. Audit Objectives The Legislative Audit Committee prioritized a performance audit of the SBDC program for the 2005 biennium. In response to issues identified by the Legislative Audit Committee, we developed the following five main audit objectives: 1) Determine if the SBDC program benefits participating businesses and does not duplicate services already available in the public and private sectors. 2) Determine if the Montana SBDC lead center performs its duties in accordance with applicable federal laws and regulations and the program s organizational structure is consistent with networks in other states. 3) Determine what types and levels of services are provided to small businesses through the SBDC program and if the program effectively serves the state s small business community. 4) Determine if levels of activity for SBDC sub-centers are commensurate with prevailing economic trends in their respective service areas. 5) Determine if the program s use of outputs and outcomes data provide an accurate and reliable basis for measuring performance. The findings and conclusions presented in chapter II show the SBDC program is meeting its overall goals and provides benefits to participating businesses. Methodologies conducted under our first audit objective included a comparison group study of businesses participating in the SBDC program. We conclude the program is providing benefits to businesses receiving counseling services. We Page 1

19 Chapter I - Introduction & Background also conclude that alternatives to program services are either unavailable or unaffordable for many small businesses. In subsequent chapters, we identify areas where the efficiency or effectiveness of program operations could be improved. Specifically, we address improvements in compliance with federal regulations, delivery of services to special emphasis groups, network resource allocation, and performance measurement procedures. Background and funding information is provided in the sections below. Audit Approach Unless otherwise stated, analysis of program data addresses calendar years 1998 through This timeframe was established to ensure sufficient historical data was available to identify trends in program activities. Further information relating to audit scope, scope exclusions, and methodologies relating to audit objectives and subobjectives are contained in Appendix A. Background Information SBDC is a business technical assistance program. Business technical assistance consists of non-financial services designed to help businesses overcome problems and promote growth. The program was developed to provide small businesses professional counseling and training services they could not otherwise access or afford. SBDC assistance generally includes the formation and development of business plans, financial projections, and marketing strategies for small businesses. Services are delivered through individual sessions with a SBDC counselor, or through group training workshops organized by the regional sub-centers. The SBDC program also acts as an information resource and referral for other specialist services and programs aimed at small businesses. The SBDC program originally developed from technical assistance programs in land grant universities. Small business technical assistance was seen as a natural extension of the mission of the land grant universities. Montana s SBDC program is significantly different from the majority of other states in that sub-centers are not located in universities or other institutions of higher education. Montana and several other states have been granted exceptions under Page 2

20 Chapter I - Introduction & Background federal law allowing them to locate SBDC lead centers in nonuniversity organizations or agencies. The following table summarizes basic management information for the SBDC. Table 1 Basic Management Information for SBDC Calendar Year 2004 Annual Budget $1.4 Million SBDC Counselors 13 Department Administrative Staff 2.5 FTE Clients Counseled 1,406 Counseling Sessions 2,712 Counseling Hours 5,576 Training Events 240 Training Event Attendance 2,534 Source: Compiled by the Legislative Audit Division from department records. Statutory References The SBDC program is established in the Small Business Act (Public Law ), which authorizes the SBA to make grants to states for administration of the program. The Small Business Act also outlines SBDC grant funding formulas, state matching requirements, required activities and services, coordination with other federal small business programs, and oversight procedures. The Code of Federal Regulations (Title 13, Chapter 1, Part 130), outlines specific operational requirements for the states administering the program. Federal regulations address the role of the lead center and subcenters, operating requirements for sub-centers, SBDC service provision, responsibilities of lead center directors, establishment of program advisory boards, grant application and matching funds requirements, and program audit and oversight procedures. Page 3